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Gjensidige Forsikring ASA
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Good morning, everyone and welcome to this Fourth Quarter Presentation of Gjensidige. My name is Mitra Negard and I am Head of Investor Relations.
I have the pleasure of introducing our new CEO this quarter, Geir Holmgren. He will give you the highlights of the quarter and the year, before handing the word over to Jostein Amdal, our CFO, who will be discussing our numbers in further detail. And we have plenty of time for Q&A after that.
Geir, please.
Thank you, Mitra and hello, everyone. My name is Geir Holmgren and I am the new CEO of Gjensidige. During the past few weeks, since joining the group, I've had the pleasure to gather insights and learn about our great organization. I have met with many of my new colleagues across various functions, markets and locations where we are present. Listening to the input and witnessing the way they work, there is no doubt that the talented and hardworking people of Gjensidige and the strong culture here are the key to our success.
I have met an organization with high competence, a strong performance culture and customer centricity. It's an honor and a privilege to be a part of an organization with such an important social mission and good values and that deeply cares about its employees and customers. I have great respect for Gjensidige's strong legacy and I'm very excited to embark on this journey to further develop the market leader in Norway and realize our profitable growth ambitions. I also believe that we can continue our strong track record of solid, high-quality operations and further improve cost efficiency. On that note, let us take a look at our solid fourth quarter and full year results before Jostein discusses these numbers in further detail.
Please turn to Page 2. Gjensidige generated a profit before tax of NOK1.694 billion in the fourth quarter. The underwriting result was a solid NOK1.174 billion, reflecting healthy growth in premiums and good cost control. We continued to put through price increases at least in line with claims inflation. Even though we had an increase in medium-sized claims which were within a normal range for our winter quarter, the underlying frequency loss ratio increased only slightly. Large losses were higher but broadly in line with what we had expected for a quarterly average in 2022.
The comparison figures from '21 also include a positive effect from COVID that brought down the loss ratio. Improved conditions in the financial markets resulted in a return of NOK560 million on our investments in the fourth quarter. Bear in mind that the investment results for the fourth quarter 2021 included NOK1.2 billion related to appreciation in the value of Oslo Areal's property assets, as you know the divestment of the company was completed during the first quarter in 2022. Annualized return on equity came to 19.3%.
And then turning to Page 3 and looking at the year as a whole. Gjensidige generated a solid underwriting result of NOK5.856 billion and delivered on all financial targets. The combined ratio was a very strong 81.4%, significantly below the target of 85%, thanks to very strong performance in Norway and progress in Sweden. The transformation efforts in Baltics are gradually coming through, although it will take some time to see this in the results.
The full year cost ratio was 13.7%, well within our goal below 14%. You have an efficient capital base with a solvency ratio at 179%, within our targeted range of 150% to 200%. As mentioned, annualized return on equity for the year was 19.3%, a strong achievement considering the challenging financial markets. Our Board has proposed a regular dividend in line with our dividend policy. Jostein will speak more about the dividend proposal in a moment.
And then over to Page 4. I'm highly convinced of the importance of integrating sustainability in all aspects of our operations. I have seen that Gjensidige has done a great work so far. Gjensidige plays an important role in the Nordic society and I am deeply engaged to make further progress in this area.
The group continued to put through strong efforts through 2022, implementing numerous measures within the 3 focus area: safer society, sustainable claims handling and responsible investments. Gjensidige will contribute to a safer society by building and sharing knowledge about the consequences of climate change and the loss of nature. That is why we work to implement good incentives in products and services so that our customers and society are better equipped to adapt to climate change.
We will continue to cut climate emissions in our investment portfolios, claims processes and internal operations. We will continuously work to reduce waste and support measures for the reuse of materials and in repair processes. We will work for our path to reach our climate targets to be approved by science-based target initiative and with that, reach a new milestone in our work and create the confidence that we are on a steady course towards net 0 emissions in 2050.
Gjensidige has received valuable and motivating recognitions confirming that our work is acknowledged by the outside world. We will continue implementing necessary initiatives going forward and I'm looking forward to keeping you updated on our progress.
With that, I will leave the word to Jostein to present the fourth quarter results in more detail.
Thank you, Geir and good morning, everybody. I'll start on Page 5. We delivered a profit before tax of NOK1.694 billion in the fourth quarter. The underwriting result reflects continued strong operations. We generated significant premium growth and delivered further improvement in our cost ratio.
We saw an increase in the underlying cost ratio this quarter, mainly due to an increase in midsized property claims in commercial. The amount of such claims will have some natural variation from quarter-to-quarter. This also applies to large losses which have been -- which were significantly higher than the fourth quarter in 2021 but still within what we should expect to occur from time to time. We do not see any particular trend in these claims numbers. The financial result reflects improvements in the financial markets during the quarter. Our pension business generated record high results.
Turning to Page 6, a few words about the operations. I'll start with inflation. Claims inflation so far has been in line with our expectations and we continue to be able to pass on necessary price increases to stay ahead of the inflation curve. There are signs that the inflationary pressure may be subsiding in some areas. The pressure on building materials prices seems to have peaked because of demand cooling off, lower raw material prices and more stable supply chains. Based on our latest analysis, we expect claims inflation for private property in Norway in the 4% to 6% range going forward. This is 1 percentage point down from our expectation back in October last year.
For motor in Norway, we still expect inflation in the range of 4% to 7% at the higher end in the short term. We'll continue to put through price increases at least in line with expected claims inflation.
Demand for our products and services remain strong and we expect this to continue, thanks to low risk of a grave recession in our region and resilience in demand for insurance products. But of course, if the recession turns out much more severe, this could have an impact on our top line growth as well. We have put behind us a year with very strong performance in Norway and the development in the fourth quarter was also very good. Premium growth in private remained high despite tough competition. We have managed to continue to put through necessary price increases while maintaining our high customer retention and profitability is very good.
Our commercial segment also generated solid result this quarter despite the high level of large and midsized claims. Premiums continued to grow strongly and retention remained at a high level. Our top brand ranking in the IPSOS survey is a strong vote of confidence from commercial insurance customers in Norway. We are very encouraged by the solid January renewals, proving a continued hard market into 2023. Thanks to our strong position, we will continue to raise prices to reflect expected claims inflation and we are confident that we will be able to put this through. For certain pockets in the large corporate portfolio and in certain other segments, there is still a need for price increases beyond inflation.
Performance in Denmark was somewhat weaker than the same quarter in 2021. I'm very pleased with the premium development in the commercial portfolio. Growth in the private portfolio reflects both competition and lower Danish motor and property sales. We continue to move forward with a new core IT system, getting closer to a complete migration of the private products. We expect to start migrating the commercial products next year. This will strengthen operational performance when fully implemented.
I'm very pleased with the continued progress in Sweden. We have succeeded in putting through necessary price increases. Our risk selection has improved considerably and we have implemented effective cost measures. We will continue our efforts to further increase profitability going forward. We have also seen improvements in the Baltics, thanks to tariff improvements, pruning and operational efficiency measures. But we have not reached our goal yet. Profitability needs to improve. We have strong expectations from our ongoing measures despite tough competition and high inflationary pressure. For 2023, we expect the combined ratio to move below 100% and then further improve in the following years but recognize that we have a more vulnerable position in this relatively small segment.
Turning to Page 7. The strong development in premiums continued in the fourth quarter, up 8.4% adjusted for currency effects. We saw a strong increase in premiums for the private segment driven by price increases for motor, property and accident and health insurance as well as by slightly higher volumes for motor. I'm very happy that we maintained our strong competitiveness and continued to hold our superior market position.
The significant rise in premiums in the commercial segment followed effective pricing measures, solid renewals throughout the year and volume growth for motor, property and accident and health insurance. Premiums in Denmark increased by 8.8% measured in local currency, driven by growth in the commercial segment. Dansk Tandforsikring was consolidated from October 1 which also contributed to premium growth. Premiums in the private segment, excluding the contribution from NEM Forsikring, were somewhat lower, impacted by a 2.3 percentage point decrease in customer retention.
Premiums in Sweden, measured in local currency increased by 5.3%, driven by growth in the commercial portfolio. Customer retention increased by 1.2 percentage points. Earned premiums in the Baltics increased by 5.4% measured in local currency, with growth in most insurance lines. The customer retention rate decreased as a result of the implementation of higher prices. This is something we have been prepared for on the path to improved profitability.
Turning over to Page 8. Adjusted for the positive COVID-19 impact on claims in the fourth quarter of 2021, the underlying frequency loss ratio increased by 1.8 percentage points. This was primarily driven by the mentioned increase in midsized property claims in commercial and higher frequency claims in Denmark. Private generated a slightly improved underlying frequency loss ratio when adjusting for the COVID claims in 2021.
Sweden and the Baltics also showed an improved underlying frequency loss ratio. Large losses were significantly higher than the same quarter in 2021 but broadly in line with our long-term expectation. Together with slightly higher run-off gains, this brought the loss ratio for the quarter up to 71.6%. This quarter, we have come to an end with the planned releases of the excess reserves identified back in 2015. Starting from the first quarter of 2023, with IFRS 17 coming into effect, it will no longer be possible to make planned releases of excess reserves. But although our reserves reflect our best estimates, they will also in the future be run-off gains and losses, in line with previous experience.
Let's turn to Page 9. We recorded NOK1.141 billion in operating expenses in the quarter. Our cost ratio moved further down by 0.4 percentage points to 14%. And if you exclude the Baltics, the cost ratio was 13.4% for the quarter. The main drivers of this improvement are premium growth and strong cost discipline across the group. Our cost ratio in Norway was stable at 11.2%, thanks to premium growth and continued focus on cost efficiency. Sweden and Baltics showed an improvement, as you can see from the chart on this slide, with the main drivers being effective cost-cutting measures and higher premiums but also including some positive one-off effects. The acquisition of the dental health insurer, Dansk Tandforsikring, drove the increase in Denmark's cost ratio in the fourth quarter.
A few comments on our pension operations on Slide 10. The pretax profit increased to the record high NOK73 million, thanks to a continued growth in number of pension members and higher assets under management. An increase in the risk result related to the paid-up policies also contributed to the good results. Assets under management increased to NOK55 billion, reflecting the acquisition of a portfolio with effect from November, in addition to an increase in the number of pension members.
Annualized return on equity was 15.1%. The solvency ratio at the end of the quarter was 143% after taking account of NOK400 million in proposed dividends to the parent company. I'm very pleased to see how we succeed in growing our business and generating strong results even with the significant changes in the market brought on with the launch of the individual pension account in 2021. We have an agile and highly cost-efficient pension business set for further growth going forward. The new core system which is currently being implemented in pension, will provide further opportunities for digitization and automation of processes. We expect profits to increase over time.
Moving on to the pension -- sorry, to the investment portfolio on Page 11. Our investment portfolio generated a return of 1% in the fourth quarter. The match portfolio returned 0.9% and the free portfolio returned 1.1%. The result for the quarter was positively impacted by higher equity markets, lower interest rates and lower credit spreads. All asset classes, except private equity funds generated positive returns. As a reminder, there is a 1 quarter lag in valuation for this asset class.
The risk in our portfolio was broadly unchanged this quarter. It is worth mentioning that our exposure to listed equities was NOK200 million lower than the NOK1.9 billion recorded as carrying amount at the end of the quarter due to derivative positions. We kind of rule out further market turbulence and we are prepared. Although we can't avoid the impact, we have a balanced portfolio and a solid fixed income portfolio with a large majority having investment-grade rating. Our investment strategy remains firm.
Over to Page 12. Our Board has proposed a regular dividend for 2022 of NOK4.125 billion corresponding to NOK8.25 per share, up 7.1% from the regular dividend for 2021. The proposed dividend represents a payout ratio of 90%. For Norwegian general insurance customers, this once again bodes for distribution of a solid customer dividend from Gjensidigestiftelsen. With this, our solvency margin is at a good level, providing us sufficient flexibility to maintain our S&P rating, capacity for smaller acquisitions, organic growth and a buffer for regulatory changes. Our dividend policy remains unchanged. We aim to pay a high and stable normal regular dividend.
Over to Page 13. We had a solvency ratio of 179% at the end of the fourth quarter, down 11 percentage points from Q3. Eligible own funds came down with the Solvency II operating earnings and returns in the free portfolio more than offset by the proposed dividend. The acquisition of Dansk Tandforsikring had a small negative impact on the funds as well. Capital requirements rose slightly with premium growth and effects from the annual update of the internal model, partly offset by a lower market risk as a result of lower private and emerging market equity exposure. The change in the reinsurance program also had a small effect on the capital requirement.
A few words on the latest developments of our operational targets on Slide 14. Customer satisfaction continues to be at a very high level, although the annual survey in 2022 showed a slight decline from 2021. The high score confirms our strong customer offering, particularly in Norway. We will continue to seek further improvement in all our markets. Retention in Norway remained at a high and stable level. Outside Norway, there is still room for improvement. Retention in Denmark and Sweden was stable during the quarter and came somewhat down in the Baltics as a result of the pricing measures I mentioned a few moments ago.
Digitalization and automation are key measures to maintain cost efficiency. Our digitalization efforts continued throughout the quarter. Our digitalization index measuring progress in digital sales and service, interaction with customers exceeded our annual goal. I'm particularly satisfied with the development in digital sales this quarter. We also saw a further slight increase in automated claims. Our operational KPIs are important to support delivery on our strategic priorities and financial targets. We'll continue to improve delivery on all these metrics going forward.
And finally, on Page 15, just a reminder that we will be reporting according to IFRS 9 and 17 from the first quarter of 2023. We have been preparing for this transition for quite some time and we're ready to report according to the new standards. We will provide you with the fourth quarter 2022 figures based on the new standards as soon as possible and at the latest by the end of March.
I'll now hand the word back to Geir.
Thank you, Jostein. Let me share with you a few words about our direction going forward on Page 16. You can see this strategy remains firm, centered around our mission to safeguard life, health and assets. It's based on our vision to know the customer best and care the most. Gjensidige has a clear set of priorities towards 2025. These are centered around building on our strong and unique position in Norway, improving profitability outside Norway and demonstrating capital discipline with a rational approach to M&A and capital returns to shareholders.
We will continue to pursue being a leading general insurance provider in the Nordics and in the Baltics. Macroeconomic factors such as inflation, climate risk and industry trends are creating uncertainty but most of all, opportunities. Our response to this is to maintain a high innovative spirit, strong customer orientation and continue our strong track record of having solid and high-quality operations.
At the same time, I will ensure that we also improve our cost efficiency which already is a competitive advantage. We will continue to seek profitable organic growth potential in all our markets and I will make sure that Gjensidige seeks growth pockets and value-enhancing inorganic growth opportunities in our markets, including both bolt-ons and larger transformational M&A deals. In addition, we need to make sure we have the ability to execute quickly and with agility to stay ahead of market cycles. My key motivation and commitment is to ensure that we focus on this path to create value for all our stakeholders.
To sum up on Page 17. We are very pleased with the solid results Gjensidige has delivered and I'm very confident that we are on the best possible trajectory to continue our strong performance. We will stay ahead of claims inflation. And unless the current geopolitical situation becomes dramatically worse, we do not expect to see any significant negative spillover to our underwriting result. We will continue to create value for our stakeholders, including paying out attractive dividends to our shareholders.
Over the next few months, I will focus on gathering a deeper understanding of our business and I'm looking forward meeting with our key stakeholders.
And with that, we will now open the Q&A session in this presentation.
[Operator Instructions] We will take the first question from Faizan Lakhani from HSBC.
I had 3 questions. The first was on the underlying frequency loss ratio development, in particular in commercial in Denmark. It seems to have deteriorated over this quarter and it seems to be quite broad-based. I just wanted to understand what's driving that? Has something changed in this quarter versus sort of the previous 9 months? And the second question is on the solvency ratio, SCR development. What is this and how much of the NOK300 million was due to sort of reinsurance program versus sort of premium growth? And my final question is on your comment around inorganic growth. I just wanted to understand your view in terms of life and pension, if that is something that you're looking at as a market?
I'll start with the first two and I think Geir will handle the third one. It's correct that we have an increase in the underlying frequency loss ratio, both in commercial and in Denmark. And as we mentioned in the report, a quarter is a fairly short period within nonlife insurance and there is natural variation in also losses below what we report as large losses externally, what we call midsize losses here. And we've seen that there's been a higher number and amount of these losses, especially in the commercial Norway part in Denmark. That's recorded as underlying frequency loss or it affects the underlying frequency loss ratio as we reported. We regard this as pure volatility, no trend, nothing to read forward from those numbers. This is just the nature of business. There are variations and a number of fires in any given quarter.
Yes. Solvency II, the growth in the SCR. If you take away the reduction in the SCR due to some derisking on the asset side, there is approximately NOK0.5 billion increase in the SCR from the kind of operational side which is the main driver for that. That is growth in the exposure, partly volume, partly -- but more also inflation driven. And that is more important than the reinsurance part. And then also remember that there is a small increase by this Dansk Tandforsikring in the quarter included there. But if you kind of just list them, growth is more important than the changes in the reinsurance program. Also -- I mean, yes, we do disclose somewhere in the report, well hidden, the changes in the reinsurance program. So it's a small increase in the retention level for the first loss on the pure risk losses from NOK100 million to NOK200 million and then a small increase on the catastrophe reinsurance program from NOK200 million to NOK250 million for the first loss. This has a minor effect on the capital requirement.
When it comes to inorganic growth regarding life and pension, we do have a solid operation here in Norway. We do actually have a very good year back in 2022 with good growth and a great profit from this operation. We do some investment on the technology side which also will improve our value proposal to the customers. What we see in the Norwegian market is that the life and pension proposal connected to this P&C proposal in the commercial market has been very successful. We do end up with having customers which are very satisfied with the total delivery. So we see definitive pockets with the possibilities here or opportunities to grow further regarding life and pension. But that's -- I'd also like to say that this is ambition for the Norwegian market. We do not see any -- do you have any ambition to talk about life and pension outside Norway.
All right. And just to come back to the underlying development. I understand that there's variability quarter-to-quarter. Some of it is sort of large losses leaking into the underlying. But when I look at the commentary -- you sort of mentioned a number of lines, motor accident and health insurance, in particular. I would have assumed there would be less growth in sort of variability. Have I misunderstood that?
The mid-sized losses that we talked about are mostly focused on commercial property. So that is correct. There is some variation also in the pure frequency loss ratio. But I think it's important to remind that we get through the price increases necessary to meet the expected claims inflation and we have done so for many quarters in a row. So the main reason there is some natural variation within losses and not kind of read over to what you should expect for the years to come.
The next question comes from Vinit Malhotra from Mediobanca.
Yes. Can you hear me, please? Yes. So first question is just -- just back on the commercial business but just also trying to understand the runoff in commercial were indeed a bit higher than last year and also overall group runoff. I'm sorry if I missed the comment in the early update of the call but is there anything worth noting in the runoff that you can point to, please? And second question is just on your chart showing the retention levels which is Slide 14. It looks like the Denmark line, for example, is falling a bit away from the strong Norwegian line. Is there any comment there that you would like to flag, please?
The runoff on the commercial. No, there is nothing particularly to read out of those numbers, I would say. There is a combination of the last quarter of the planned reserve releases related to workers' compensation on the commercial Norway portfolio. And then there is some variation in runoff gains based on kind of cases being closed at lower amounts than what they were originally reserved for which is -- that's the reason behind this. Again, sorry to state that there is kind of no trend you should read from this neither.
Okay. When it comes to retention in Denmark, as mentioned in the presentation, it's a decrease compared to earlier year. We are not satisfied with that development. And I also like to say that we are doing an IT investment in Denmark. It's an ongoing project. It will definitely improve our value proposition in the market. And we are committed to improve the results in Denmark going forward. And I'm also confident that we will make progress in our work which will also improve the results from the Danish business.
The next question comes from Hakon Astrup from DNB Markets.
Two questions from me. And the first one is to Geir. I know it's early days but can you talk a little bit of what will be your key focus as CEO? And if you will do anything differently from what has been done in the past? And the second question on reinsurance. We've seen that prices there has come off quite meaningfully. How is that impacting Gjensidige?
Gjensidige's strategy remains firm. It's centered around our mission to safeguard lives, health of assets and it will continue that way. And we also see and I see some considerable organic growth potential in all our markets which is very interesting and we probably include many opportunities. Gjensidige has a clear set of priorities going forward and we're aiming for being one of the leading general insurance companies in the Nordics. So we seek profitable growth outside Norway but with a rational approach to M&A and capital returns to shareholders. Nordic position is attractive and I also think it gives scale, risk diversification and competent synergies.
So going forward -- what I've seen in Norway, we have a very strong value proposition in Norway. We have excellent underwriting competence. We have great analytical skills which also improves the value proposition to the customers. So trying to get these skills and competence to work also in Denmark and in Sweden to improve the operations in both Denmark and Sweden is something I think is very, very important going forward. But at the same time, I will make sure and ensure that we will still focus on cost control, improving cost efficiency which, as you know, is already a competitive advantage. So my key motivation and commitment is to ensure that we are actually focused on this way to create values going forward.
On the reinsurance side, yes, there was a tough market. The talks has been of the toughest market for several decades, this renewal in January 1. Luckily, our strategy has been -- or luckily it's been a strategy for many years to focus on reinsuring on the kind of peak losses, both in terms of single risks and events which means that our reinsurance program is a fairly small part of -- or share of the overall premiums, approximately 2%. And that means that even a fairly high percentage increase in reinsurance premiums has a limited impact on the total profitability.
Having said that, it's important that we manage to get all the necessary kind of security and the capital backing that we need from the reinsurance market in this renewal. So that's kind of nothing uncovered. And we see this also as a potential opportunity because companies that are more heavily dependent upon reinsurance will have a higher cost increase than we have seen.
The next question comes from Ulrik Zurcher from Nordea Markets.
My first question is just a follow-up. Like what has your cost increase in reinsurance been? Could it be in the size of NOK100 million, NOK200 million going into next year? And is it particularly catastrophe reinsurance that has gone up in price or other programs too is my first question?
Yes, the increase has been higher within property -- or kind of property -- both single risk and cat coverages higher than what we've seen in -- you can say we have reinsurance against large liability risk, personal accident, catastrophes and motor and the increase there has been smaller than for the -- what you could call property which is kind of all kind of fixed buildings everywhere. In terms of the amount of increase in reinsurance, we haven't disclosed that. Mitra is shaking her head there. So -- but it's a significant percentage point increase here. You see an external report talking about 30% to 40% price increases in the reinsurance market.
Okay. So I guess you don't want to disclose any P&L effect what would change in the reinsurance program either, just to make sure.
Yes. The main point, I think if you start with a 2% overall reinsurance premium as a percentage of gross premiums and you can add on whatever percentage you like there. There's going to be a small effect.
Yes. And then secondly, on the commercial segment in Norway. I was -- we know what you expect on the private side but what level of claims inflation on an underlying basis have you actually seen in the commercial segment in 2022? And how was the repricing in the 1st of January this year compared to last year?
Okay. Starting with the kind of inflation we have seen and then maybe Geir will comment on the January 1 renewal afterwards. But we -- the actual realized claims inflation that we have seen in '22 has been very much in line with what we have given you as forecast throughout the year. And sorry if we were a bit imprecise, I think, in our comments on the property claims inflation going forward. We see a similar picture for commercial as we see for private on the property side. I think maybe I said private property claims inflation but it was meant to be property in general. But this is -- as you know, we give a range because it's 5 to -- or 4 to 6. It's a range because we are uncertain about the future. So a similar picture. And as you remember from what we have told you in the previous 4 quarters, we started the year with a higher expectation of claims inflation that we're now talking about going forward.
When it comes to commercial market in Norway and price increases, we have price increases for the renewal in January which is at least in line with claims inflation. And we have also seen that it's a very successful renewal with only a few customers leaving the company. So we have a renewal rate of mid-90.
And just a last one. Sorry for a lot of questions. But how should we think about the SCR development going forward? Do you see any potential to reduce market risk further? And I was also wondering if you could just give us an update on what the running yield on your bond portfolios are now?
Yes, I'll start with the SCR. And it's -- as I said, the investment strategy remains firm which means that we will kind of continuously monitor market developments and make asset changes to the allocation as we see fit all within this investment strategy that has been, I would say, more or less unchanged from over a couple of years. So it's -- we don't guide on any kind of specific development of SCR. In general, SCR from the insurance side will grow slightly less than the overall growth in the portfolio because there are some diversification effects as we continue to grow. The running yield in the portfolio is approximately 3.5% at the moment. Reinvestments during the quarter made, of course, at a higher rate because the interest rates have been going up over the last 12 months. So they were at 4.7% in the -- what we reinvested during this quarter. And then, of course, you remember that from 2023 everything will be mark-to-market. So the difference between kind of the amortized cost and the other bonds is then gone from first quarter.
The next question comes from Vegard Toverud from Pareto.
I wonder if you could start with reminding us of the dynamics of the risk margin in the solvency calculation. It seems to be a change there of around NOK400 million quarter-on-quarter. So I'm just wondering if you could give us some insight as to the change there. Secondly, you commented to the need for repricing certain pockets within the corporate portfolio. Could you give us some color on which pockets that is? And lastly, if you can discuss somewhat about the competition in private Denmark. Is there any changed share Q-on-Q from market participants? Or is it more of the same picture we have seen for a couple of quarters?
The risk margin on the reserves in the solvency calculation which is kind of different from the risk adjustment that we'll start presenting from Q1 in the IFRS 17 calculation. And no principal changes there and it is typically going in line with the underlying growth. But if there are some changes in the product composition, there could be some changes. I don't have a breakdown of the increase this quarter compared to last quarter at hand now. We could look up -- look at that at a later stage, Vegard. But there is kind of a principle of these changes and no specific things this quarter around that side.
Second one was?
Pockets.
You mentioned that certain pockets within the corporate portfolio has risen.
Yes. We pointed to that the large corporates is one of the areas where we need still to continue with the pricing that is above expected claims inflation. And pockets means that there are much more differentiated parts or a segment or a split of the portfolio than what we communicate externally. The pricing measures will be differentiated based on our view of claims inflation and the view of these customers or customer segments' profitability historically.
And then there's no kind of product specific, it's more general customer type?
No, it's more customer segment than product type. And third one was competition in Denmark. No change in the competitive picture quarter-on-quarter.
The next question comes from Jan Erik Gjerland from ABG.
The first one is on this partial internal model which shows 230%, if I recall correctly, on the slides. What kind of limitation would it have for you to get an A rating when you look at your PIM versus sort of the -- in the normal model you have today of 179%. So is this A rating your sort of requirement or limitation when it comes to dividend distribution? Or is it so that you could go down to 150% in the internal model and still be within a A rating? Could you shed some light on that? That would be great.
Yes. I think we are -- have set our solvency margin range with a view on our financial target of being at least A rated. So that means that we have some flexibility within that solvency margin range. Yes. And then -- yes, I'll stop there.
And when it comes to the paid ups, how much do they tie up now? You said some quarters ago that they tied up around NOK1.4 billion. With the higher rates, I would assume that they would tie up less than that. So could you just update us on what's this timeline? And also what kind of diversification you have with your nonlife business?
I don't have the number of the capital requirement on the paid ups at hand here now. And I think we talked about the capital requirement for the pension business and the diversification benefits between the pension business as such and the nonlife insurance business being quite high. And of course, higher interest rates is good for this portfolio and that is reflected in the capital position of the pension company. And as I mentioned, we are -- the Board of the pension company is proposing a dividend of NOK400 million to the parent company for 2022 which, of course, is higher than the accounting profits due to the favorable development of the solvency margin which is again dependent on also the interest rates margin -- the interest rate level.
Okay, perfect. Finally, you mentioned some potential issue on the top line if you went into a recession. Could you just shed some light into how you -- the private side will develop and how the commercial side could develop if you sort of see more difficult times for the household and the commercials in Norway?
I mean, from what we've seen from previous kind of minor recessions, this has no impact on the private demand for nonlife insurance. So if it's grave -- and I'm talking about Scandinavia. Mainly in Baltics, the picture has been a bit different, where a more immediate effect on the insurance demand. On the commercial side, the volume of business is slightly more dependent on kind of just the business volume on Norwegian or Scandinavian businesses. There could be turnover-based insurance premiums, premiums that are dependent on the number of employees on the personal insurance side and so on. And there, there will be some more direct effects. But given the fairly shallow recession which is kind of the expectation, I think, widely out there, then this should have -- not have a large impact on the demand for commercial insurance neither.
Okay. Have you seen anything -- because we are aware that where some cars being -- taking the license off because you could do it on the Internet rather than deliver it on the station. Have you seen an increased sort of level of plates being delivered back on the Internet rather than what you have seen in the past due to people only have one car rather than the two cars?
I'm speculating a bit on it but I think the main reason is that it's much more convenient to deliver it, not because of any economic development here. Yes.
The next question comes from Youdish Chicooree from Autonomous Research.
I've got two questions, please. The first one, if I may, if I could go back on the development in the frequency loss ratio in the fourth quarter. I appreciate that midsized property claims can be quite volatile quarter-on-quarter. But looking at your commentary, in Denmark, you are flagging kind of frequency across a number of lines there, motor, property, commercial, even health. So are you also attributing that to just like bad luck? Or do you think there are lines there where maybe you need to actually take some pricing actions or reduce costs? That's my first question. The second question is on M&A, actually. I think in your opening remarks, you talked about a disciplined approach to M&A and rational how many transactions. So I was wondering if you could give us a sense of how much you want to spend in the mobility and health insurance space in the coming maybe 3 to 5 years. And can you remind us what your hurdle rate is when you assess any transactions in this space, please?
I'll start with the Danish question and then I think Geir will take the second part, Youdish. You're absolutely right that we point to midsized -- kind of volatility in mid-sized claims. Especially, for the commercial property, there's more property-related midsized claims. There is something in the other lines but there is also some which is kind of pure underlying volatility as I answered to one of the previous questions. So there is a mix of both. When we look at the pricing measures that we have in place in Denmark, they are at least in line with claims inflation all across the board, all products. And the January 1 renewal that Geir mentioned a couple of questions ago, was strong also in Denmark which kind of bodes well that we are managing to cope with the kind of claims inflation picture. But there will continue to be some volatility in the actual claims number as we realize them.
Okay. Regarding M&A and opportunities, we'll continue having a strong capital discipline. Yes, we are looking for companies that could improve our underwriting result. You mentioned if there could be any more investment into the mobility. We are continuously looking for companies or targets that will improve our margin results. So that's important to say when it comes to M&A. You mentioned also the hurdle rate when it comes to -- actually, I'll have a look at the positive net present value. And the hurdle rate, we have set to 6.5% cost of equity after tax. So this is something we bear in mind when we actually go out and try to assess and consider any M&A opportunities.
Is that not too low of a rate considering interest rates have increased quite a lot over the last year or so?
Could be discussed there. This is the cost of equity hurdle and we need to create positive value above that. And this is a kind of a costing bit, not a return on investment input as such, if you see the difference.
And the next question comes from [indiscernible].
I just have one question on reinsurance from a slightly different angle. How should we think about the volatility of earnings going forward given that you're also a bigger company now due to the strong growth over the past couple of years but also, in particular, in light of the higher retention on your first year loss given the reinsurance change. Should we expect more volatility? And I guess related to that, the question -- the decision on you retaining more risk. Was that because there wasn't enough capacity in the market? Or was that because it wasn't sort of worth paying more to access that capacity. So it was more of a balanced act for you guys. So any comments would be appreciated.
There's a slight increase in volatility given that retention was raised for the first loss from NOK100 million to NOK200 million in the kind of the main property risk and reinsurance program. But I mean it's very limited. It's one loss -- NOK100 million for a year. And then on the cat side, from NOK200 million to NOK250 million retention which again is -- yes, it's a slight potential increase in volatility if there's an actual catastrophe but very limited. The reason for increasing the retention was kind of a cost benefit decision. We believe these layers of reinsurance programs very too costly. We could have gotten them but they were just not price efficient, I would say. So it's a pure rational decision based on the reinsurance prices.
Okay. And then you also increased your aggregated thing from NOK500 million to NOK600 million. I'm assuming that your aggregated cover given the company now is -- probably the challenge of meeting the aggregate probably will be higher. How we should think about that in light that you're actually a bigger company given the growth you had over the last 2 years?
I think -- I mean, your point, it's a good point to make, because given that we have increased in size over a number of years and these retentions have been fairly stable. And kind of in reality, we have been more or less more conservative as the company has grown and the retention level has stayed fairly stable. Also as a larger company, we have -- are continuing increasing the amount of diversification benefits from -- by being a bigger company. So I mean, it's a good point to make there. This is in that, too, even less of an issue.
The next question comes from Johan Strom from Carnegie.
So a lot of my questions have already been answered. But just quickly in Norway, both for the private and commercial segment, are you seeing any signs of different competitive behavior? Are you seeing anyone gaining market share or pushing prices? Just curious on your thoughts for Norway.
Okay. There are no major changes in the come-to-market dynamics in Norway. And we are quite confident that all the major players are having -- or staying to their ambitions. And we also see that we will come through with our price increases. But you also see some activities from Fremtind, you see some activities from SpareBank in the private market. But we are quite confident on what we have done into 2023. We see that all the price increases are going through and keeping up with having a profitable business.
And your next question comes from Thomas Svendsen from SEB.
Yes. So you point to that your solvency position is strong. So why do you not suggest an extraordinary dividend this time? It's still some way down to the mid of your targeted range. And of course, there's more room down to the lower part of your range. And to put the question another way, how should your solvency be before you are suggesting paying out excess capital?
I think we always say our solvency is strong, Thomas. And it is at 179%. It is fairly close to the midrange. We stick to our dividend policy of high stable ordinary dividends or regular dividends. We increased it by 7.1% compared to the last year which is okay. And we'll stick to that going forward. If there is kind of what the Board deems kind of too much capital, there will be a special at that time. And that is a continuous analysis or evaluation that the Board does throughout the year.
Okay. But are there any sort of risks sort of outside the model that you are sort of concerned about, I think, about geopolitical issues, etcetera and wanted to have sort of an extra buffer compared to a normal state?
No.
No. As we see the geopolitical situation at the moment, we are not worried about the impact on our business. If it is dramatically worse at one time, it can have some consequences. But at the moment, as we see it, we don't see any special impact on our business and we don't try to keep any capital in the business to meet such a situation.
The next question comes from Blair Stewart from Bank of America.
Most of my questions have been answered but I've got one question left. Just on the dividend outlook, both regular and special, I guess, you've now reached a 90% payout and you're looking ahead to albeit a new accounting regime but also about $1 billion less profits because of lower prior year development. So I was just wondering how -- does that then become more challenging to sustain your wish to pay a stable nominal dividend going forward? If you have any element of bad luck at all, then it might be challenging to do that. And therefore, is the comfortable capital position in the future more going to be used to supplement your regular dividend as opposed to paying special dividends?
The main driver or determinant of how much we can pay out in dividends is not IFRS, either the previous or the new regime. It's the solvency development which is kind of the guiding of the dividend capacity. And so the change in the accounting regime doesn't change the solvency calculations. Also bear in mind that the planned reserve releases that are taken into account in the IFRS accounts are not -- do not have that effect on the solvency development. As we communicated when we started this development, the whole planned reserve releases for the whole period was taken into account at the moment we communicated those to the market. So that's a big difference between the IFRS earnings and the solvency capital generation. Hence, the stop of the planned reserve releases does not affect the dividend outlook either.
Okay, great. That's very clear. And what would then be the threshold -- coming back to some of the earlier questions, what would then be a threshold for special dividends? I notice consensus expectations going forward is for special dividends, albeit relatively small. I just wonder what's the threshold for what defines excess capital.
There is no...
Is it above 200?
I think we demonstrated here that when solvency margins get kind of quotation marks too high, then we will pay out specials. To take off the theme, we also have an eye on capital efficiency here to generate a fairly high return on equity, I would say, with a new target of above 20%. So there is a pressure that we have put on ourselves to deliver on the return on equity target, at the same time as having this financial flexibility that makes us able to act if there are good opportunities and there will be in our mind at least always value creating for the shareholders. That's how we operate.
The next question comes from Roy Tilley from Arctic Securities.
I think most of my questions have been answered as well but just 2 brief ones. You mentioned that the planned reserve releases don't impact the solvency generation but you're consistently delivering higher runoff gains than your planned releases. So I'm assuming that does impact the solvency generation. That's the first question. And secondly, more short term. Just wondering -- we've been reading a lot of newspaper reports about water damages -- claims related to water damages and motor being at a much higher level this year than usual. How do you see this winter shaping up so far? Are you concerned about claims development in Q1? That's the 2 questions.
Yes, the -- you're correct, Roy. The unplanned releases, to put it that way, they do affect solvency calculations. So they are kind of helping us in generating dividend capacity as well. And as we talked about on numerous occasions that there is -- on average, historically, has been a positive run of gains over and above the planned releases. So that's been a very long-term average, I will say. And Geir, for this...
Yes. When it comes to claims frequency or effects from fluid and kind of being in a winter quarter, we have seen some volatility in the fourth quarter, as explained, some more midsized claims but still in line with what we probably can expect. And we have done price increases into 2023 to at least be in line with the expected claims inflation. So I'm not worried about the loss ratio going forward.
We will take the next question from Michele Ballatore from KBW.
Yes. The -- my question regards the -- your mobility ecosystem, your mobility offering. You did an update on this in June 2022. I was wondering if you can remind us the contribution to the underwriting result for this initiative for 2023?
Yes. First, to kind of how it should improve the improvements in the underwriting result which I think is your question, is of the result as such in the company but how it improves the underwriting result. And the main and most important part there is how it works through the claims handling operation, where we, through having the roadside assistant which we've named from Falck to RedGo, is actually being the first point of contact in many claims situation and makes us able to gear the claimant towards our preferred workshops and so on. So it has an effect on the claims side and also on the -- also, I would say, on the sustainability side, because then we can guide them to our licensed garages or repair workshops. So it's good from that perspective.
Then the toll road companies fleet, the main effect there is on the top line there, because through this toll road connections or the ship, we are having contact with a large number of car drivers which is also not our insurance customers in the first hand and we can use that as a good cross-selling base for the insurance side. So it should increase growth in the longer term. So that is kind of the main drivers on the underwriting side. And then, of course, we are looking at developing services on top of that, new services that are catering to the mobility needs of our customers. So that will be -- we'll tell you when we are launching them. We've said that number wise that we do expect annual effects from the second half of 2020 -- I mean -- remind you, annual effects at around NOK100 million to NOK150 million in reduced claims costs, annualized effects. And then on the top line, we said around NOK40 million in underwriting contribution annualized from 2023.
So this -- so it's NOK100 million -- NOK150 million plus NOK40 million on the underwriting?
NOK150 million plus NOK40 million, that's correct.
We will take the next question from Jimmy Fan from UBS.
Three, please. And first one on -- is on claims trends in Norway. I guess looking at private versus commercial, it is showing different underlying frequency trend. You are highlighting the motor class as being unfavorable in most of -- really in 4Q. I guess, what claims trend are you seeing in motor in Norway in terms of frequency and severity of claims?
There's a slight increase in the underlying there. But I mean, I would say -- more or less answer there is no particular trend there. In the fourth quarter -- for the fourth quarter -- I mean, the quarter is typically a bit higher on frequency but lower on severity because they are -- yes, due to the weather and driving here slightly more kind of small accidents happening in this type of weather. But if you compare fourth quarter of 2022 to fourth quarter of 2021, one, I think, the difference is -- there has maybe -- especially, December of 2022 was slightly tougher than December 2021. But if you look at the quarter as such, I think it's more or less washes out some -- that's why we haven't tried to kind of quantify any effects or anything like that in the -- weather effects in the fourth quarter. There might be something there but it's too small to make a big note of it, I think.
That's very helpful. And also on the reinsurance side, I mean, the increase in retention. I guess, was it more because of cost consideration? Or it is because just reinsurers simply do not want to offer the same coverage as before?
We could have it replaced but at a much higher cost. And we deemed it not beneficial from a pure economic perspective not to keep the same retention levels.
Okay, makes sense. And also lastly, on IFRS 17. I mean, you previously said the risk adjustment sat at 89 percentile in terms of the confidence level. I guess are you looking to keep it at this level? Or it's subject to review at some stage once you see what the industry level is? And would that decision influence your view of technical -- the strengths of your technical provision plus the risk margin on a Solvency II basis as well?
A difficult technical question. I think we chose a confidence level for the risk adjustment -- sorry for the building work. No claims. It is -- we have what we think is a best, appropriate level for this risk adjustment. Whether -- or with time there turns out to be some kind of industry consensus, that is different. We'll, of course, look into that. But so far, we have no plans for changing it.
I think we will need to close the call now, operator. We are well over time. I would like to just make a statement towards the end here. Is that okay?
Please go ahead.
Okay everyone, we've received a few questions on where we have described our reinsurance program which has received a few questions today. This description is, as always, in our appendix section of the quarterly presentation. This quarter, on Page 31 you will find the details there. We will be participating in a number of road show meetings this quarter, among others in Oslo, London and Frankfurt. You can have a look at our financial calendar on our website for more details.
Thank you for your attention and have a nice day everyone.